Cbot Pushes Carbon Copy Of Its Pollution-permit Auction Idea

Years ago, the Windy City's approach to air pollution was pretty simple: Send it up, and watch the jet stream blow it east.

These days, Chicago stands for something quite different when it comes to smog. The city has become a hotbed of ideas for market solutions to environmental problems.

The success of a Chicago Board of Trade program to auction off permits for sulfur dioxide--the substance that makes acid rain--is leading to another, more-ambitious effort. The exchange's strategy major-domo is pushing for a new market in carbon dioxide--the gas blamed for global warming.

"It's the Chicago approach," said Richard Sandor, the exchange official, who also heads investment-banking firm Centre Financial Products Ltd. "We want to do in carbon what we did in sulfur."

The issue is on the front burner. At a White House conference Monday, where Sandor presented his idea, President Clinton said he is "completely persuaded" that carbon pollution from fossil fuels could create a "catastrophe."

But while Clinton wants to promote energy-efficient technologies and take the global lead in enacting pollution controls, industry groups worry his policies will boost energy costs and put U.S. businesses at a disadvantage. A conference is scheduled for December in Japan.

Sandor wants to establish an auction market where oil refiners, electrical utilities and other big users of fossil fuels could buy and sell air-pollution permits. Each permit would allow the owner to emit a certain amount of carbon dioxide.

Participants who failed to reduce their carbon emissions would have to buy more permits, while those curbing air pollution below allowable limits would get extra permits they could sell at a profit to those who keep polluting.

The idea is modeled on the sulfur dioxide trading program. The CBOT has conducted five annual auctions for U.S. electric power utilities, trading thousands of permits that each allow their owner to dump a ton of sulfur into the atmosphere.

The program reduces pollution two ways: The number of available permits declines over time, so less pollution is allowed overall. In addition, each company has a financial incentive to reduce its emissions below the maximum allowable levels.

"Overall it is working," said Robert Repetto, senior economist at the World Resources Institute, a Washington-based environmental think tank. "The key is providing incentives for firms to go beyond their requirements."

Environmentalists were suspicious when the Board of Trade pushed the idea through the Environmental Protection Agency in the early 1990s.

"Market solutions were considered a license to pollute," said Sandor. "This time, emissions trading is considered viable."

Still, a new practice is raising eyebrows: As part of their economic development efforts, New York and other states are offering free pollution credits to lure companies.

The prospect of trading air is too much to resist, said Sandor. "That's the mother of all markets."

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